The NHS is under immense pressure - ambulance waits, record A&E attendance, long elective waiting lists, hospitals full of patients medically fit for discharge, workforce shortages and strikes. Every day it seems that the operational and political pressures continue to rise. But the state of NHS finances seems to be going under the radar in comparison. We know from finance professionals that this is another real challenge facing the majority of NHS trusts. HSJ’s reporting1 in the autumn identified that two in three ICSs were reporting deficits against their year-to-date financial plans. But what is the emerging financial position for trusts? Are stretched finances adding to the operational challenges? Using publicly available board data from trusts, we have analysed the financial picture in England.
Finances under increasing strain
Our analysis looked at the finance reports of a sample of 55 trusts, including 20 large acute, 15 smaller acute DGHs, 10 mental health and 10 community trusts, to assess the financial performance to the end of September 2022, half-way through the NHS financial year. We defined large acute Trusts as those with turnover greater than £650 million and DGHs as those with turnover less than £475 million.
In total, the 55 trusts’ year to date run rate resulted in a £325 million deficit by September, which was £211 million off plan. The deficit represents 1.8% of the year-to-date total income of the 55 trusts. We found that:
- the acute sector is the main driver as 35 acute trusts in our sample reported a year to date run rate deficit of £330 million by September, which represents 2.2% of the year-to-date total income
- the financial performance of the 20 mental health and community trusts in our sample was much better, reporting a total year to date run rate surplus of £5.1 million by September.
Acute trust deficit
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Mental health and community trusts surplus/(deficit)
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The forecast year end position
The 55 trusts we analysed are forecasting to achieve a £114 million deficit at year end. This would be a £211 million improvement on the deficit faced half-way through the year (£325 million). Assuming our 55 trusts are representative of all NHS trusts, this would indicate the provider sector is on track to deliver a year end deficit of £346 million. From our analysis we found that:
- acute trusts are expecting to deliver a £211 million surplus in the second half of the year, resulting in a full year deficit of £119 million – a significant and perhaps aspirational improvement in financial performance given the current operational difficulties
- the 20 mental health and community trusts in our sample are forecasting to achieve a £5.5 million surplus at year end - very much in line with the year to date performance.
Our analysis has found that the financial challenges are concentrated in the acute trusts, with their forecast improvement in the second half of 2022-23 based on assumptions linked to improvements in operational performance and delivery of increased productivity/cost savings. Given the operational challenges and the fact that savings plans are notoriously profiled for the second half of the year, this forecast looks optimistic. While there is likely to be some scope for improvement in financial performance in the second half of 2022-23, through non-recurrent balance sheet savings, and the release of underspends from elsewhere in system finances and central budgets, the emerging year to date run-rate seems like a realistic projection of where trusts will end up at year end.
From our sample, as a percentage of total income, the current year to date run rate deficit is 1.8%. If this is extrapolated across all trusts, using an estimate of the total trusts income in England in 2022-232, we estimate a year end deficit of approximately £2 billion, with the large and DGH acute hospitals contributing £1.8 billion to this.
Key drivers behind significant deficits
To understand what is causing these deficits we analysed what trusts outlined in their board papers and found that the majority (69%) cited under-delivery against their cost/waste reduction plans (CIP) as the key factor. Other factors included: COVID-19 spend higher than planned, cost inflation higher than funding, higher temporary staffing (bank and agency) costs due to substantive staff shortages and staff absences, and under delivery against the elective recovery fund (ERF). This indicates plans for 2022-23 were set based on inaccurate, historical activity and financial baselines and included operational assumptions which have not been achievable.
Nearly half (47%) of trusts cited unplanned operational pressures as impacting on financial performance and this is a key driver behind some of the other reasons provided. Given the ongoing operational pressures, and the competing demands for resources between elective recovery and urgent care, it seems reasonable to assume that the financial position will not be recovered by year end. As we reported nearly two years ago, a lot of the deterioration in financial performance in 2022-23 can be tracked back to consistent issues we see year after year.
Key reasons given for deficits at September 2022 (% of Trusts)
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Implications for next year
We are now in the final quarter of the NHS financial year and so attention is already moving to future years, following the release of the 2023-24 operational planning guidance3 by NHS England. Our analysis suggests that many trusts won’t be able to recover and hit their year end budgets, given the scale of the emerging deficit in 2022-23. This means that some systems will fail to balance their budgets and very little can now be done, operationally at least, to improve the financial position. However, in the next few months, non-recurrent balance sheet savings and the release of underspends from elsewhere in system finances and central budgets, will likely ease the position a little at some trusts.
But there will be real implications for those trusts and systems unable to meet operational targets and recover their financial position in 2022-23. This is likely to mean additional scrutiny and challenge from the regulator, loss of some capital funding and tighter cost controls and totals in 2023-24.
What can be done
The final 2022-23 financial position will now be determined by the extent to which trusts can control costs in the face of immense operational pressures, and how much non-recurrent measures, and other sources of system and central funding, can be released. Focus needs to be on securing financial sustainability in the medium term by:
Understanding the underlying position
The majority of acute trusts continue to have underlying, operational deficits. Stripping out non-recurrent funding and costs and resetting efficiency and productivity plans needs to be undertaken to update the underlying position coming into 2023-24. A key priority should be to understand elective and urgent and emergency care activity baselines, particularly with the changes to funding for activity. Understanding the baselines, and the causes and drivers, is key for trust boards, systems and regulators.
Triangulating plans
The impact of the pandemic on waiting times, the need to recover elective activity, and operational pressures on urgent care, can overshadow other aspects of care and financial recovery. But if operational and financial plans are to be delivered, it is vital that there is genuine triangulation of operational performance and activity, with workforce and finances.
Transparency of plans
There needs to be honest conversations about what individual trusts can deliver against operational and financial targets in 2023-24 plans. Simply setting breakeven plans, when underlying financial challenges and previous years’ performance and trends suggest that it is unachievable, does not help to improve performance and deliver financial sustainability.
Restore financial grip and control
Understandably the pandemic resulted in revised financial governance arrangements at trusts, but this has resulted in a loss of organisational memory about the need to maintain good processes and control. Trusts and systems now need to get back to the basics of good financial governance if any kind of financial control is to be maintained. The NHS England requirement for NHS organisations to complete the Healthcare Financial Management Association financial sustainability check-list4 has refocused finance teams on good financial governance but further work is required to ensure operational and clinical staff are also on board. Directors of Finance need the support of other senior managers to make this happen.
Productivity and efficiency
If trusts and systems are to get back on a more sustainable financial footing, they need to find more efficient ways of delivering services together, with improvements to productivity. Two-year revenue allocations for 2023-24 and 2024-25 have been issued and trusts need to find ways to do more than they did in 2022-23. The majority of trusts are not delivering their productivity and efficiency plans and this needs to change. Understanding and analysing opportunities using model hospital, GIRFT and local benchmarking is key to provide a basis for these plans. And while workforce challenges remain, the NHS trust workforce has increased since the pandemic, yet productivity has fallen.
System transformation
Significant cost and waste reduction can only be achieved through collaboration across the system. Cost savings from the sharing of corporate and non-frontline services and changes to patient pathways are key areas of opportunity to deliver services in a more sustainable way. Everyone needs to understand these are often long-term change programmes and not quick fixes.
System working
We worked with the HFMA to produce a briefing on three key areas of focus for systems when developing plans. We need to wait a bit longer to see what the Hewitt Review5 says about the role and oversight and governance of integrated care systems (ICS), but ICSs need to work with trusts, primary care, social care and other service providers to prevent hospital admissions and manage patients outside of acute care settings. This will deliver real productivity improvements, improve value for money and put system finances on a more sustainable path.
The competing demands of delivery, improving emergency care and reducing elective waiting lists versus the resources available are a huge challenge for the NHS. Delivering long term financial sustainability is no longer an option, it is essential.
To find out more insights on the NHS from our public services advisory healthcare team, please contact Peter Saunders or Matt Custance.
References
1 ‘Real worry’ as two-thirds of ICSs fall into the red, Health Service Journal, 2022
2 We have used the 2020/21 total income by trust and inflated this to 2022/23 prices
3 2023/24 priorities and operational planning guidance, NHS England, 2022
4 Improving NHS financial sustainability: are you getting the basics right?, Healthcare Financial Management Association, 2022
5 Hewitt review: call for evidence, GOV.UK, 2022
